How Do I Know If I'm Prepared for Retirement?

The age-old adage suggests that you should retire when you can. Retiring “when you can” is different for everyone on an individual basis. For example, pro athletes making millions of dollars a year to play a game most of us play for fun [and for free] can retire whenever they feel comfortable doing so. Their retirement is only an issue if they have mismanaged their money. The rest of us are not so lucky. So what can we do to make sure we are set for success?

For those nearing retirement, Social Security will provide you with a nominal income month to month based on your career input. You can retire anywhere from 62 to 70, but note that retiring early has its disadvantages, mainly the amount set to last your lifetime after 65 has now been decreased due to starting your retirement earlier than 65. Based on current projections Social Security may not exist too much longer unless major changes occur.

Unless you are a retired school administrator where you’re receiving a substantial yearly pension and health benefits for the rest of your life, the money you receive via Social Security will not be enough to cover your expenses through the rest of your life.

The assumption I make with the constant advances in technology and rigors of work is that an individual will retire at 62, as soon as they can and receive Social Security, and live into theirs 90s. So for an easy calculation let’s say that you want to retire at 62 and expect to live until 92. You need to cover 30 years’ worth of expenses. Your expenses would likely consist of water bills, electric bills, a telephone/television/internet bill, gas, and other household livings expenses.

Let’s say your total cost of living per month is $4000 with these expenses and you’re receiving $1000 a month from Social Security. You know you will need to make up $3000 per month for the next 30 years. That is a whopping 360 months, the size of the longer mortgages. That is $1,080,000 needed to live for that time period, and not comfortably either, just to pay your bills.

So if I want to retire, I need to have over a million dollars saved? Not exactly, that is just in accordance with our example. You might need substantially less depending on your Social Security monthly payments, a pension, and other monetary gains you’ll receive after retirement.

However, there are some tips we have for those in the situation as described in our example. Our assumption is that you have paid off the mortgage and own your house. This is important to complete before retirement for two primary reasons: 1) a mortgage payment can be substantial to those who aren’t working, and 2) it allows you to sell your house if you decide to downsize.

Tips:

• Downsize your home: The kids are all moved out and have careers of their own. Do you and your spouse really need that big of a house? If you are able to sell your house and downsize it is recommended. You may not be able to due to sentimentality, or you might want to leave it in your inheritance. However, if you can, downsizing your home will not only make you money, but save you money as well. If you own a house worth $500,000 and sell it for $450,000 then purchase a new home for $150,000 you have gained $300,000 minus the fees associated with home buying. Since you’ve purchased the new home straight up there is no mortgage to concern yourself with. Downsizing a home means there is less of everything, so the water bill, electric bill, etc. will be lower each month. This allows you to save money you may have otherwise thought you would have spent.
• Pull Your Money Out: Once you’ve retired there is no reason to be gambling with any money you have available to you. Cash out your IRAs, 401Ks, etc. and put create CD ladders with the money. That is put some money in a yearly CD, some money in a 2 year CD, some money in a 3 year CD, etc. This way your money is always earning you more money. You can continue this pattern until you absolute need to use the money put into the CDs for your own expenses.
• Plan for a Rainy Day: Unexpected expenses come up, it is a fact of life. You might have to replace a tire on your car, fix the roof on your house, or pay a substantial medical bill. We mentioned above that the person who needed over a million dollars to retire wouldn’t live comfortably and this is the reason why. You need to have more than your bills compute to in order to retire comfortably because things will come up.
• Have a Plan: In the example mentioned above for the individual with $4000 a month in bills and $1000 in income coming in each month they needed over $1,080,000 just to pay their bills for the remainder of their lifetime. Let’s say they did downsize their home and have $250,000 available to them from the sale and purchasing a new home. This means they will need $830,000 to cover all other bills for the next 30 years. Where do they get this money? Well, a spouse may receive another $1000 a month from Social Security, which will equate to $360,000 over those 360 months. This means between the two of you only $470,000 is needed to pay off all of the bills for the last 30 years of your life. A plan needs to be created from here to determine how you are to survive the next 30 years with that financial need. Will your combined savings cover it? Will you need to obtain a part time job? Will you both need to obtain a part time job? Do you have other property you can sell off? This plan should be created before you start contemplating retirement and modified as your financial situation changes.
• Only Retire Once You Can: If you are blessed with a good job that will let you retire on your own terms you may want to work longer. This will allow you more time to build up savings, pay off expenses, and increase your Social Security payments and limit the need to accommodate more months of retirement, as you will be living longer. Say you work until 70, it is likely your Social Security payments will be more per month and your savings will be higher due to working 8 more years.

Overall, it is an individual’s decision on when to retire, but it is best to consider your cost of living when making this decision. Consider property taxes, cost of living increases, price increases on food, etc. so you are aware you need to be covered for more than just your monthly bills. Retiring without the right plan in place can lead to you trying to secure work at an advanced age when it is unlikely you will be hired.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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